How Will the New Tax Reform Affect Your Charitable Giving?

As of January 2018, the new tax reform accompanied major changes that will impact your charitable giving through 2025. Here’s a brief overview of the tax law changes and how these may affect your charitable giving.

Income Tax Changes

The new standard deductions are $12,000 for a single individual, $24,000 for married couples filing jointly, and an additional $1,300 deduction for people who are 65 or older, blind or disabled.  The new standard deductions may impact whether you are able to itemize your deductions, including charitable contributions, state and local taxes, qualified mortgage interest expense, and medical deductions.

While the charitable deduction limitation for cash donations was increased from 50 percent of adjusted gross income (AGI) to 60 percent, your ability to claim the charitable deduction may depend on whether your other itemized deductions exceed the new standard deduction.

Specific changes were made to all categories of itemized deductions. The change in the state and local income and real estate tax deduction, which limits the deduction to $10,000, may directly impact the ability for certain taxpayers to have itemized deductions over the standard deduction. The new tax law also repealed the “Pease limitation” on itemized deductions that limits deductions for upper-income taxpayers.

Giving options and techniques for income tax purposes include:

  • Bunching or bundling itemized deductions, including charitable contributions, in alternating years to exceed the standard deduction in those years.
    • i.e. Delay a typical year-end gift in December 2019 to a January gift in 2020, and then make a second gift in December 2020, thus making two gifts in the same year.
  • Make qualified charitable distributions from your IRA—only available for taxpayers who are 70 ½ or older and are required to take a minimum distribution from their IRA accounts. This technique reduces the taxpayer’s adjusted gross income (AGI) for the amount of the qualified distribution taken out of the required minimum distribution. Reducing the AGI could also reduce state income taxes and increase medical itemized deductions to over 7.5 percent of the AGI.
  • Consider setting up a donor-advised fund where the taxpayer makes a large contribution in one year to fund future gifts to charitable organizations. Making a larger contribution in any given year may provide enough itemized deductions to be more than the standard deduction.
  • Gifts of appreciated stocks have not changed but still remain a good way to avoid paying capital gains on sales of those stocks and retain a full charitable deduction. These types of contributions remain limited to 30 percent of your AGI.

Estate and Gift Tax Changes

The lifetime estate and gift tax exemption were essentially doubled, from $5.49 million per person to $11.2 million per person, which includes an inflation adjustment for future years through 2025. Although the annual excludable gifts per person of $15,000 remained unchanged, it is expected that far fewer taxpayers will be subject to federal estate and gift taxes. With these changes, come more opportunities for life time and legacy charitable gifts.

Giving options and techniques for estate and gift tax purposes include:

  • Make charitable bequests and charitable beneficiary designations in your estate plan and use the estate and gift tax savings from the new tax law to fund them.
    • Making a charitable beneficiary designation in your IRA or other retirement plans could also save either your estate or future non-charitable beneficiaries’ income tax dollars on the distributions made subsequent to the taxpayer’s death.
  • Charitable gift annuities may be attractive to taxpayers who need a monthly income, but could generate both a remainder gift as well as a current deductible gift.

With such significant changes from the recent tax reform, careful planning to maximize your deductions for charitable giving is recommended. The opportunities mentioned could lead donors to consider a plan that can make a greater impact for your favorite charitable organizations.

For further questions regarding your contributions, please contact one of our non-profit advisors at 216-566-9000 or email at info@barneswendling.com

To view other key changes with the Tax Cuts and Jobs Act, click here to view our webinar.

 

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